CHAPTER 7 INVESTMENT PROPERTY

Learning Objectives

• Define investment property.

• State the initial and subsequent measurements of investment properties.
• Apply the fair value model of accounting for investment properties.
• Account for transfers to/from the investment property classification.

Investment Property
Investment property (PAS 40) is “property (land or a building – or a part of a building – or both) held (by
the owner or by the lessee under finance lease) to earn rentals or for capital appreciation or both, rather
than for:
a. use in the production or supply of goods or services or for administrative purposes; or
b. sale in the ordinary course of business.”

Investment property vs. PPE

Investment property Owner-occupied property

 Held to earn rentals or for capital appreciation  Held for use in the production or supply of
or both. goods or services or for administrative
purposes.
 Generates cash flows largely independently of  Generates cash flows in conjunction with the
the other assets held by an entity other assets held by an entity.
 Includes only land and building  May include assets other than land and
building
 Accounted for under PAS 40  Accounted for under PAS 16

Examples of Investment Property

a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course
of business.
b. Land held for a currently undetermined future use.
c. A building owned by the entity (or held by the entity under a finance lease) and leased out under
one or more operating leases.
d. A building that is vacant but is held to be leased out under one or more operating leases.
e. Property that is being constructed or developed for future use as investment property.

Examples of items that are not investment property

a. Property intended for sale in the ordinary course of business or property acquired exclusively
with a view to subsequent disposal in the near future or for development and resale.
b. Property being constructed or developed on behalf of third parties (PFRS 15 Revenue from
Contracts with Customers).
c. Owner-occupied property (PAS 16) and owner-occupied property awaiting disposal.
d. Property that is leased to another entity under a finance lease.
Property that is partly investment property and partly owner-occupied

If the portions could be sold separately (or leased out separately under a finance lease), an entity accounts
for the portions separately. The portion being rented out under operating lease is classified as investment
property and the portion used as owner-occupied is classified as property, plant, and equipment.

If the portions could not be sold separately, the property is investment property only if an insignificant
portion is held for use in the production or supply of goods or services or for administrative purposes. If
the owner-occupied portion is significant, the entire property is classified as property, plant, and
equipment.

Ancillary services to occupants

When ancillary services are provided to the occupants of a property held, the property is classified as
investment property if the services are insignificant to the arrangement as a whole.

Illustrative Problem

ABC Co. has the following assets.

Vacant building to be leased out under operating lease 4,000,000

Building being constructed for XYZ, Inc. 800,000
Building under construction to be used as office 1,600,000
Building under construction to be rented out under operating lease 400,000
Building rented out to MODULATE’s employees who pay rent at market rates 3,200,000
Office building awaiting disposal 200,000

How much is the total investment property?

Solution:
Vacant building to be leased out under operating lease 4,000,000
Building under construction to be rented out under
operating lease 400,000
Total investment property 4,400,000

Initial Measurement

An investment property is initially measured at cost. the measurement of the cost depends on the mode of
acquisition. The cost of my purchase investment property comprises the purchase price and any directly
attributable costs incurred in bringing the asset to its intended condition see the discussion in chapter 6.

The following are excluded from the cost of investment property and are expensed immediately:
a. Start-up costs (unless they are necessary to bring the property to the condition necessary for it to
be capable of operating in the manner intended by management)
b. Operating losses incurred before the investment property achieves the planned level of occupancy
c. Abnormal amounts of wasted material, labor or other resources incurred in constructing or
developing the property
Illustrative Problem
ABC Co. has the following transaction during the year.
• purchase building to be held as investment property for P1,000,000. direct cost incurred
amounted to P20,000. costs of day-to-day servicing for the asset totaled P5,000
• Constructed building to be used as investment property. The total costs incurred include the
following:
i. Materials, labor, and overhead P2,000,000
ii. Star-tup costs 100,000
iii. operating losses 50,000
iv. abnormal amount of wasted material
during the construction 20,000

• land acquired with currently undetermined future use by issuing notes payable with face value of
P1,000,000 and a present value of P800,000
• land to be used as investment property was acquired through exchange. For value of asset given
up in exchange for land is P3,000,000. Fair value of land receive is P3,600,000. Additional cash
paid for the land received is P500,000. The exchange has commercial substance.

Requirement: how much the total cost of investment property on initial recognition

Solution:
purchased building (1,000,000 + 20,000) P1,020,000
constructed building (materials, labor and overhead) 2,000,000
land acquired through deferred settlement 800,000
land acquired through exchange
(FV of asset given up plus cash paid) (3M + 500K) 3,500,000
Total initial costs of investment properties P7,320,000

Subsequent Measurement

After initial recognition, an entity chooses either cost model or fair value model as its accounting policy
and applies that policy to all its investment property.

Cost model
After initial recognition, an entity that chooses the cost model shall measure all of its investment property
at cost less any accumulated depreciation and impairment losses in accordance with PAS 16 Property,
plant, and equipment.

Fair value model

• After initial recognition, an entity that chooses the fair value model shall measure all of its investment
property at fair value, except in cases where the exemptions under PAS 40 applies.
• Changes in fair values are recognized in profit or loss.
• Depreciable assets classified as investment property measured under fair value model are not
depreciated.
• If the fair value of an item of investment property cannot be determined reliably on initial
recognition, such item is subsequently measured under the cost model.
Illustrative Problem

An entity acquires a building at a purchase price of P10, 000, 000 and spend an additional P3,000,000 in
getting the building to the condition for its intended use. The building is intended to be leased out under
various operating leases. Accordingly, it is classified as investment property. the building becomes
available for lease on January one, 2021, the investment property's fair value is P12, 000, 000.
Initial Measurement
The building is initially at its cost of P13, 000, 000 (10M purchase price + 3M direct costs). This is
irrespective of accounting policy chosen for subsequent measurement.

Subsequent Measurement – Dec. 31, 2021 (Cost Model)

under the cost model, the investment properties carried at each cost less accumulated depreciation and
accumulated impairment losses.

Cost Php 13,000,000

Accumulated Depreciation [(13 M / 20) X 1 Yr] (650,000)
Carrying Amount – 12/31/2021 12,350,000

Depreciation expense (13M / 20) (650,000)

Subsequent Measurement – Dec. 31, 2021 (Fair value Model)

under free volume order, investment properties carried at its fair value at the end of each reporting period.
Changes in fair value are recognizing profit or loss. The investment property is not depreciated

Carrying Amount – 12/31/2021 12,000,000

Unrealized Loss 1,000,000

Transfers
Transfers to, or from, investment property shall be made when, and only when, there is a change in use,
evidenced by:
• Commencement of owner-occupation, for a transfer from investment property to owner-occupied
property.
• Commencement of development with a view to sale, for a transfer from investment property to
inventories.
• End of owner-occupation, for a transfer from owner-occupied property to investment property; or
• Commencement of an operating lease to another party, for a transfer from inventories to
investment property.

Illustrative Problem: Transfer Under Cost Model - PPE To Investment Property

on January 1, 2021 ABC Co. decided to lease out under operating lease one of each building that has
previously used as office space. The building has an original cost of P3,000,000 and carrying amount of
P1,000,000 and fair value of P1,200,000 as of January 1, 2021. ABC use the cost model for both PPE and
investment property. The building has remaining useful life of 10 years as of January 1, 2021. ABC use
straight line method of depreciation.
Requirement: provide the Journal entry to be made on January 1, 2021.

Solution:
the entry to record the transfer of building to investment property is as follow:

2021
Jan. 1 Investment Property 1,000,000
Accumulated Depreciation - Bldg. (3 M - 1M) 2,000,000
Building 3,000,000

Dec. 31 Depreciation expense (1M / 10yrs.) 100,000

Accumulated Depreciation – IP 100,000

Illustrative Problem: Transfer Under Cost Model - Investment Property to PPE

On December 31, 2021, ABC Co. decided to use as office space one of its building that was previously
leased out. the building has an original cost of Php 3,000,000 and accumulated depreciation of Php
2,000,000. the recoverable value of the building is Php 800,000 as of December 31, 2021. ABC Co. Insert
space uses the cost model for PPE and investment property.

Requirements: Provide the journal entry.

Solution:
The entry to record the transfer of building to owner- occupied property is as follows:

2021
Dec. 31 Impairment Loss (800,000 - 1M) 200,000
Building 800,000
Accumulated depreciation- IP 2,000,000
Investment Property 3,000,000

Illustrative Problem: Transfer under fair value model - Investment Property to PPE
On December 31, 2021, ABC Co. decided to use as office space one of its building that was previously
leased out. The building has fair value of Php 1,000,000 and Php 1,200,000 insert space on January
1, 2021 and December 31, 2021 respectively. ABC Co. uses fair value model for investment property.

Requirement: Provide the journal entry.

the entry to record the transfer of the building to owner- occupied property is:

2021
Dec. 31 Building 1,200,000
Investment Property 1,000,000
Unrealized Gain on Change in Fair Value 200,000
Illustrative Problem: Transfer under fair value model - PPE to Investment Property
On December 31, 2021, ABC Co. decided to lease out under operating lease one of its building that was
previously used as office space. the building has original cost of Php 3,000,000 end accumulated
depreciation of Php 2,000,000 as of January 1, 2021. annual depreciation of Php 100,000. ABC uses the
fair value model for investment property. The fair value of the building on December 31, 2021
is Php1,500,000.
The entry to recognize depreciation on the building for 2021 is as follow:

2021
Dec. 1 Depreciation Expense 100,000
Accumulated Depreciation - bldg. 100,000

The entry to record the transfer of the building total investment property as follows:

2021
Dec. 31 Investment Property (Fair Value) 1,500,000
Accumulated Depreciation - bldg. 2,100,000
Building 3,000,000
Revaluation Surplus 600,000

Illustrative Problem: Transfer under fair value model – PPE to Investment Property

On December 31, 2021, ABC Co. decided to reclassify a building obviously use as owner- occupied
property to investment property.

ABC Co. determined the following:

Historical costs Php3,000,000
Accumulated depreciation - Dec. 31, 2021 2,000,000
Carrying Amount - Dec. 31, 2021 1,000,000
Carrying amount had no impairment loss
been recognized previously – Dec. 31, 2021 1,200,000
Fair value - Dec. 31, 2021 1,600,000

ABC uses fair value model for investment property.

Requirement: Provide the entry to record the transfer of the building to investment property.

Solution:
Increase recognized in equity (1.6M - 1.2M) = 400,000
Increase recognizing profit or loss (1.2M - 1M) = 200,000
Total increase in carrying amount (1.6M- 1M) = 600,000

2021
Dec. 31Investment Property 1,600,000
Accumulated Depreciation - bldg. 2,000,000
Building 3,000,000
Revaluation Surplus 400,000
Gain on reversal of impairment loss 200,000
Illustrative Problem: Transfer under fair value model – PPE to Investment Property

On December 31, 2021, ABC Co. decided to reclassify a building obviously use as owner- occupied
property to investment property.

ABC Co. determined the following:

Historical costs Php3,000,000
Accumulated depreciation - Dec. 31, 2021 2,000,000
Carrying Amount - Dec. 31, 2021 1,000,000
Revaluation Surplus 200,000
Fair value - Dec. 31, 2021 700,000

ABC uses fair value model for investment property.

Requirement: Provide the entry to record the transfer of the building to investment property.

Solution:
Fair value - Dec. 31, 2021 700,000
Carrying Amount - Dec. 31, 2021 (1,000,000)
Decrease in Carrying amount (300,000)
Elimination of balance reval. Surplus 200,000
Impairment Loss – Profit or Loss 100,000

2021
Dec. 31Investment Property 1,600,000
Accumulated Depreciation - bldg. 2,000,000
Revaluation Surplus 200,000
Impairment loss 100,000
Building 3,000,000

Illustrative Problem: Transfer under fair value model - Investment Property to Inventory

on December 31, 2021, ABC Co. decided to redevelop its building to be sold in the ordinary course of
business. ABC uses the fair value model for investment property. Fair values of the investment property
are:

Fair value – Jan. 1 , 2021 1,700,000

For value – Dec. 31 , 2021 1,600,000

Requirement: provide that entry to record the transfer of the investment property to inventory.

Solution:

The entry to record the transfer of the investment property to inventory is as follows:

2021
Dec. 31 Inventory 1,600,000
Unrealized loss on change in fair value 100,000
Investment Property 1,700,000
Video Reference
https://www.youtube.com/watch?v=vZZ29_P-EqQ
https://www.youtube.com/watch?v=bIlWBumcQV0
https://www.youtube.com/watch?v=eRgL0CCZce0&t=1843s